medical underwriting: approaches and regulatory restrictions

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Medical Underwriting: Approaches and

Regulatory Restrictions

ByJon Shreve, FSA, MAAA

[email protected]

Dresden, Germany – April 29, 2004

Overview

• Purpose of medical underwriting

• Tools and techniques

• Common problems and challenges

• Impact on potential healthcare costs

• Comparison of approaches

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Medical Underwriting

• Used by health plans to maintain competitive, profitable and fair rates

• Internationally, tools do not vary much

• Application of tools does vary:– Regulatory environment– Available information– Custom

Need for Medical Underwriting

• Health costs vary within a population– Most costly 15% of individuals generate 80% of

healthcare costs

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• Standard distribution:– 850 low-cost members, 150 high-cost members

100%1,000533%150High-Cost24%850Low-Cost

Cost - % of AverageNumber


• Large proportion of high-cost members:– 700 low-cost members, 300 high-cost members



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• Small proportion of high-cost members:– 925 low-cost members, 75 high-cost members



Competitive Need for Medical Underwriting

• Health plan must use at least as sophisticated medical underwriting tools as competitors

– Could get disproportionate share of high-cost individuals otherwise

– "Death spiral effect"

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Tools and Techniques

• Tools– Used to gather information

• Techniques– Use to apply the underwriter's decision

Tools

• Most common: Medical Application– Information contained:

1. List of ailments2. History of hospitalization3. Other medical treatment4. Prescription drugs

– Underwriters may follow up on information by contacting doctors or applicant

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Common Problems

• Using judgment instead of data

• Using life insurance guidelines

• Letting guidelines get old

• Adapting from another country

Medical Application: Problems

• Problems:

1. Information not always complete• Reference internal and external databases to

identify other potential issues

2. Health plans often do not rescind policies containing misrepresentations• Difficult to prove applicant was aware of

condition• Can case difficult public relations

7

Techniques

• Denial

• Rider out (exclude) conditions

• Rating classes

• Pre-existing condition limitation options– Acts as temporary or permanent rider– Only cover conditions not disclosed on application

(encourages better reporting)

Impact on Potential Healthcare Costs

• Milliman Medical Underwriting Guidelines– Claims from 400,000 member longitudinal database

– 7 years of claims experience

– Identify the start of a particular condition• "Realign" claims by year of diagnosis, rather than calendar

year• Stream of costs for conditions

– Body systems• Can identify whether a rider would be useful

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Acute Condition: ChoristomaA benign neoplasm of the eye or of the choroid plexus of the brain

• Rider: Treatment associated with neoplasms, benign or malignant

Acute Condition: ChoristomaA benign neoplasm of the eye or of the choroid plexus of the brain

• Costs recede rapidly after diagnosis

• Rider not useful: 150 debit points still declines

• Underwriting decision:– Would likely decline– Might accept case, with additional premium and a

rider in years 1 and 2, but no rider in years 3 and 4. Standard risk as of year 5.

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Acute Condition: CholelithiasisThe presence of gallstones in the gallbladder

• Rider: Treatment associated with specified diseases of digestive system

Acute Condition: CholelithiasisThe presence of gallstones in the gallbladder

• Rider useful: if applied in year of diagnosis, risk is ratable because increase in cost is limited

• Underwriting decision: application of rider would allow coverage to be written

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Acute Chronic Condition: Cystocele/Rectocele

Hernia of bladder or rectum

• Rider: Treatment associated with the genitourinary system

Acute Chronic Condition: Cystocele/Rectocele

Hernia of bladder or rectum

• High costs maintained over long period of time

• Rider not useful: does not significantly reduce costs

• Underwriting decision: would likely decline

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Chronic Condition: Spondylolisthesis

Forward slippage of a lumbar vertebra

• Rider: Treatment associated with the musculoskeletal system or related

Chronic Condition: Spondylolisthesis

Forward slippage of a lumbar vertebra

• Rider useful: removes a meaningful portion of excess claim costs

• Underwriting decision: application of a rider would allow coverage to be written

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Relapsing Condition: Alcoholism

• Rider: Treatment associated with mental disorders

Relapsing Condition: Alcoholism

• Costs increase after an apparent recovery

• Rider useful: only in early years, not during relapse

• Underwriting decision: pay special attention to these conditions

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Progressive Condition: Osteoarthritis

• Rider: Treatment associated with arthropathies and dorsopathies

Progressive Condition: Osteoarthritis

• Small cost decrease for a couple of years after diagnosis, then begins to increase steadily

• Rider: does remove a portion of costs

• Underwriting decision: long-term effects due to the steafy increase may cause decline instead

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Challenges in Adaptation

• Differing frequencies

• Differing cost structures

• Travel costs

• Regulatory/custom differences

Comparison of Approaches

• United States• Brazil• United Kingdom• Hong Kong• Australia• Mexico• Colombia• Chile

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United States

• Underwriting techniques vary significantly

– Individual

– Small group

United States: Individual

• If no history of medical coverage, laws do not limit tools available to underwriter– Tools:

• Denial of coverage• Permanent or temporary riders• Rate classes• Pre-existing condition limitation

– 12-month lookback and 12-month exclusion period

• If uninterrupted creditable coverage– Only tool is rating class

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United States: Small Group

• Law requires that everyone be issued:– Without riders– Without pre-existing condition limitations for those

with uninterrupted coverage

• State law limits rate variation from one employer to another– I.e. Limited to 25% deviation from base rate

• Base rate may be adjusted for demographics of group

Brazil

• If medical condition disclosed on application, federal law limits underwriting:– A rated-up premium with full coverage– Condition is excluded for 24 months, but at standard

premium

• Since some conditions require immediate surgery, first option can cause significant adverse selection– Enables applicant to pay high premiums for 1 or 2

months, then lapse– No level of premium can cover that risk

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United Kingdom

• Most carriers use riders (endorsements) to eliminate coverage of conditions

• One carrier uses rating-up system

• Pre-existing conditions have a 5-year look back, and a 2-year forward exclusion

Hong Kong

• Conditions not at all covered by insurers unless they are disclosed on application

• Underwriter can decide to accept or decline

• Extensive pre-existing condition clause, depending on condition

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Australia

• Private medical coverage supplements a public health care system– Coverage viewed as way to speed up treatment, and

to supplement public coverage

• Underwriter can accept or decline, based on any criteria, except for protected classes

• Undisclosed pre-existing conditions are not required to be covered

Mexico

• There are no specific underwriting regulations

• Most medical insurers use underwriting manuals:– Provided by their reinsurers– Adapted from life insurance

19

Colombia & Chile

• Both countries have private healthcare integrated with social security system

• For coverage written on this basis, no medical underwriting allowed

• Full underwriting allowed for supplemental coverages

Thank You

QUESTIONS?

Jon Shreve, FSA, MAAAMilliman

[email protected]

20

AdaptingActuarial Tools

for Use in Other Countries

By Aree Bly, FSA, MAAAPresented by Jon Shreve, FSA, MAAA

[email protected]

Dresden, Germany – April 29, 2004

Overview

• Actuarial tools – what are they?• Who should be interested• Reasons for adaptation• Types of tools• Considerations• Case study

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Actuarial Tools – What Are They?

Based on actuarial principles– Risk analysis– Prediction of future events– Financial– Technical

Used to:– Analyze experience or book of business– Predict future risks– Develop new products and expected profitability– Calculate reserves

Actuarial Tools

Examples of tools

Table of Values – e.g. Table of disability rates by age

Spreadsheet - e.g. Predict annual expected cost for a book of business

Software - e.g. Project LTC cash flow and sensitivities, and produce financial statements

Incr

easi

ng C

ompl

exity

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Who Should Be Interested

Multinational companies– Consistency across countries– Consolidated reporting– Manage cross-border products– Economies of scale

Consulting companies– Similar services offered in different countries– Consistency– Efficiency– Benefit clients by using well-tested tools

Who should be Interested

Local companies– Transfer of knowledge for steeper learning curve– Faster evolution– External information not available locally

Regulators– Simulation of reform impacts– Consistent analysis of market players– Learn from others

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Reasons for Adaptation

• Globalization – operation and expansion• Summarize results• Apply lessons learned• Continuous evolution of tools• Financial benefits• Maintain consistency• Improve efficiency

Types of Tools

The following are some types of tools that tend to be wellsuited for adaptation based on cost/benefit trade off

• Experience analysis• Reserving

– IBNR– Premium deficiency– Claims

• Reporting• Cashflow projection

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Considerations

Which tools make sense to adapt?Would it be easier to adapt a current tool or build a new

one?

• Regulatory requirements• Structure of health insurance (private and public) in

each country• Cost vs. Benefit• Cultural issues

Case Study:Milliman Chile Health Cost

Guidelines

US Health Cost Guidelines– Tool in US healthcare industry for 40+ years– Flexible, reliable, consistent information– Constantly evolving– Used for

• Pricing• Benchmarking• Managing utilization• Experience analysis

– Reflect US market

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GuidelinesWhat country to go to?Latin America

– Developing markets– Some going in similar direction as US– Relatively small, easy to understand markets

Chile– Significantly developed private market– Similar structure– Competitive market– Changes in regulations add to value of tool - both for insurers

(Isapres) and for regulators


Guidelines

Considerations once market was initially chosen– Structure of market– Availability and consistency of data– User interest– Confidentiality of information

Process– Consolidate information– Analysis– Checks for consistency, completeness– Ongoing improvements

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Guidelines

Results– Simplified tool compared to US Health Cost Guidelines– Fits market needs in Chile– Accepted by market– Timely for market– Ongoing evolution

Note: also has been done in other countries U.K., South Africa

Chile HCGs – Rating Structures

Annual Length of Annual AverageAdmissions Hospital Utilization Cost per

per 1000 Stay per 1000 ServiceInpatient I. Hospital

1. Medical / Surgical 63.17 4.19 264.61 $123,1482. Mother 43.08 3.82 164.44 $125,5953. Newborn 4.45 4.67 20.74 $57,8324. Psychiatric 0.39 15.05 5.83 $52,1665. Other 4.12 5.14 21.20 $26,7376. Clinical Material 78.51 78.51 $101,994

Subtotal Hospital 193.71 555.32 $114,017

II. Pharmacy and Blood Bank 106.10 106.10 $120,821

III. Physician Fees 1. Hospital Visits 106.71 106.71 $65,759 2. Surgeries 130.89 130.89 $168,788 3. Maternity 98.64 98.64 $149,411 Subtotal Inpatient Physician Fees 336.24 336.24 $130,406

IV. Exams 1. Pathology 782.52 782.52 $12,322 2. Radiology 75.07 75.07 $62,842 3. Diagnostic / Therapeutic 71.49 71.49 $86,336 Total Inpatient Exams 929.08 929.08 $22,099

Subtotal Inpatient 1,565.12 1,926.74 $72,929

Health Cost Guidelines for ISAPRE SystemComposite Utilization and Costs of Monthly PMPM

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Chile HCGs – Rating Structures

Annual Length of Annual AverageAdmissions Hospital Utilization Cost per

per 1000 Stay per 1000 ServiceOutpatient I. Hospital / Physician Fees 1. Home consults 123.08 123.08 $18,719 2. Office visits 4,079.25 4,079.25 $14,501 3. Surgery 20.83 20.83 $51,389 4. Emergency consult 148.35 148.35 $20,169 5. Psychiatric 100.45 100.45 $27,625 6. Physical Therapy 395.96 395.96 $14,671 7. Other 31.62 31.62 $122,283 Subtotal Outpatient Hospital / Physician Fees 4,899.55 4,899.55 $15,913

II. Exams 1. Pathology 4,889.35 4,889.35 $3,969 2. Radiology 1,132.16 1,132.16 $24,396 3. Diagnostic / Therapeutic 624.16 624.16 $22,844 Subtotal Outpatient Exams 6,645.67 6,645.67 $9,221

III. Other1. Immunizations 153.27 153.27 $3,3112. Newborn Exams and WellBaby Care 36.56 36.56 $4,8483. Eye Exams 262.86 262.86 $18,3534. Glasses / Contact Lenses 108.23 108.23 $71,9705. Audiological Exams 23.23 23.23 $31,2746. Physical Exams 0.78 0.78 $3,9957. Podiatry 1.60 1.60 $21,3248. Ambulance 0.28 0.28 $44,7849. Medical Equipment 2.10 2.10 $596,546

Subtotal Other 588.92 588.92 $26,025

Subtotal Outpatient 12,134.14 12,134.14 $12,739

TOTAL 13,699.26 14,060.87 $20,987

Health Cost Guidelines for ISAPRE SystemComposite Utilization and Costs of Monthly PMPM

Chile HCGs – Basic TablesDistribution Age / Sex Factor

Primary Dependent Utilization PMPMTo 25 34,197 11,873 0.0308 3.75 98,900 950.94 0.436 0.350

25 - 29 120,972 20,346 0.0328 3.80 102,752 1,068.09 0.471 0.393 30 - 34 138,011 3,373 0.0340 3.90 106,753 1,179.04 0.501 0.434 35 - 39 132,618 1,852 0.0365 4.00 110,911 1,348.65 0.551 0.497 40 - 44 107,705 1,699 0.0451 4.15 115,230 1,796.69 0.707 0.662 45 - 49 81,631 1,650 0.0539 4.50 119,718 2,418.22 0.916 0.891 50 - 54 62,843 1,385 0.0780 5.00 124,380 4,040.34 1.473 1.488 55 - 59 46,257 1,611 0.0960 5.30 129,224 5,481.48 1.924 2.019 60 - 64 27,935 1,160 0.1399 5.50 134,256 8,608.16 2.908 3.170 65 + 28,108 4,966 0.3030 6.00 139,485 21,131.97 6.870 7.782

Composite 780,277 49,915 0.0589 4.78 123,759 2,905.38 1.065 1.070

To 25 20,084 18,601 0.0423 2.90 102,402 1,045.90 0.463 0.385 25 - 29 77,692 48,650 0.0588 2.93 105,146 1,511.10 0.652 0.556 30 - 34 78,251 54,470 0.0704 3.16 107,964 2,000.72 0.840 0.737 35 - 39 69,274 60,555 0.0734 3.40 110,858 2,304.70 0.943 0.849 40 - 44 59,843 52,777 0.0857 3.75 113,829 3,049.82 1.215 1.123 45 - 49 51,097 39,277 0.0928 4.20 116,880 3,796.71 1.473 1.398 50 - 54 35,716 32,367 0.0970 4.50 120,012 4,366.28 1.650 1.608 55 - 59 28,104 22,279 0.1193 4.70 123,229 5,764.24 2.121 2.123 60 - 64 15,738 13,608 0.1497 5.00 126,531 7,891.63 2.828 2.906 65 + 13,944 22,690 0.2059 5.30 129,923 11,817.07 4.125 4.352

Composite 449,743 365,274 0.0865 3.97 117,284 3,355.64 1.297 1.236

Primary 1,230,021 0.0679 4.38 120,689 2,987.09 1.122 1.100 Spouse 415,189 0.0865 4.13 119,107 3,547.18 1.351 1.306 Adult 1,645,210 0.0726 4.30 120,232 3,128.43 1.180 1.152

00 - 01 97,071 0.1316 6.38 129,923 9,097.12 3.175 3.350 02 - 06 282,171 0.0610 2.88 129,923 1,901.53 0.664 0.700 07 - 18 586,497 0.0368 3.39 129,923 1,350.52 0.471 0.497 19 - 22 165,894 0.0269 3.77 129,923 1,097.30 0.383 0.404

Composite 1,131,633 0.0495 3.95 129,923 2,115.29 0.738 0.779

TOTAL 0.0632 4.19 123,148 2,715.55 1.000 1.000

Health Cost Guidelines for ISAPRE System1. Inpatient - Medical / Surgical

July 1, 2004

Sex / Age RangeAnnual

AdmissionLength of

StayRate per

DayPMPM

Male

Female

Com

p.C

hild

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Chile HCGs -Cumulative Probability

Distributions

Trend in Cost 1.0000 Area Factor 1.0000 Maximum per Day - Copay - Average Cost per

Day

Adjusted for Trend and Area

Adjusted for

MaximumDistribution

94,410 94,410 - 100.00%

448 448 - 0.08%3,418 3,418 - 0.14%4,840 4,840 - 0.03%5,000 5,000 - 0.03%8,149 8,149 - 0.06%

10,745 10,745 - 0.06%11,636 11,636 - 0.06%12,425 12,425 - 0.03%13,110 13,110 - 0.03%14,295 14,295 - 0.06%16,159 16,159 - 0.30%18,024 18,024 - 0.28%20,079 20,079 - 0.77%21,693 21,693 - 0.86%24,306 24,306 - 1.21%26,295 26,295 - 0.99%27,918 27,918 - 0.69%29,841 29,841 - 1.66%31,700 31,700 - 2.84%33,768 33,768 - 3.31%37,378 37,378 - 7.42%42,538 42,538 - 6.23%47,545 47,545 - 5.43%52,313 52,313 - 3.61%57,656 57,656 - 5.30%62,326 62,326 - 2.92%67,177 67,177 - 3.94%72,263 72,263 - 2.57%77,450 77,450 - 3.23%82,498 82,498 - 3.17%89,153 89,153 - 5.54%98,626 98,626 - 6.26%

110,028 110,028 - 3.64%119,417 119,417 - 3.92%127,997 127,997 - 1.60%

MedicalInpatient

Thank You

QUESTIONS?

Jon Shreve, FSA, MAAAMilliman

[email protected]

medical underwriting: approaches and regulatory restrictions

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